Thursday, December 15, 2011

This article on Sky News caught my eye. Anyone who has seen “Slumdog Millionaire” or one of countless documentaries about India’s slums will be amazed that shacks in Mumbai’s Dharavi slums are changing hands for upwards of £50,000.

My first flat in London (Hampstead 1994) didn’t cost that much more than 50k and my first flat in Spain (Valencia 1999) cost considerably less. Even now a quick search reveals over 600 properties in and around Middlesbrough for £50,000 or less.

What’s going on? Aren’t Indian slum dwellers among the poorest and most wretched people in the world? Didn’t I see kids in the movie swimming in human excrement? Less of that sort of thing in Boro than there used to be.

The Sky article gave part of the answer to the riddle of the pricey shacks: the slums are not quite the ramshackle hellholes that you might think. The Dharavi slum is a highly organized, functioning community with thriving businesses and properties that have housed the same families for generations. Over time the authorities have recognized their legitimacy and hooked up utilities. Most of all it is very close to the commercial heart of Mumbai (“location, location, location”).

But nevertheless India is a poor country despite rapid growth recently. How can people afford to bid up slum dwellings to such levels? The average wage is so low that Reebok recently announced that it was planning to sell a pair of trainers for $1 to get into the market. That does not suggest that India’s boom has yet created enough spending power to justify slum dwellings at UK prices.

The real explanation may lie in recent Indian interest policy. Rates have been as low as 3% and even now, with inflation needing to be reined in, Indian interest rates are only 7%. As is usually the case with these amazing property price stories, the root cause is lax monetary policy. We in Britain have seen such house price booms so many times before; they make everyone from the Finance Minister to the shack owner feel like they are economic geniuses until they end, as they always do, in tears and a painful bust.